Breakup and Default Risks in the Eurozone
42 Pages Posted: 27 Nov 2019 Last revised: 14 Jan 2020
Date Written: November 15, 2019
Since the burst of the sovereign debt crisis, investors perceive the concrete possibility of a breakup of the Eurozone. We exploit CDS quotes for contracts denominated in different currencies and default clauses to estimate the network of breakup and default risk spillovers in the Eurozone isolating the relevant factors with shrinkage estimation techniques. We find that most Eurozone countries are exposed to economically large redenomination risk spillovers, with the effects stronger at shorter maturities. Redenomination shocks to one country, Italy, spillover on the redenomination and default risks of most other Eurozone countries.
Keywords: redenomination risk, CoVaR, elastic net, LASSO
JEL Classification: G10, C31, C45, C58
Suggested Citation: Suggested Citation